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The pensionable age

Steve Wanless considers the no-nonsense view on pensions of the chief economist of the Bank of England, Andy Haldane.

At last – a banker who manages to talk sense, common sense, not nonsense! Step forward Andy Haldane, chief economist of the Bank of England.

His boss the governor, Mark Carney, may have got into hot water for his analysis of the consequences should the UK vote to “leave” the European Community in the June 23 referendum, but Haldane’s plain speaking has been greeted with almost universal approval. (1)

“I consider myself moderately financially literate, yet I confess to not being able to make the remotest sense of pensions,” Haldane told an audience of bankers and politicians.

Most experts agree Haldane was unfair and inaccurate to lump in “independent financial advisers (IFAs)” with the “countless experts”. The Financial Conduct Authority (FCA) set rigorous standards for IFAs who offer pension (and other) advice and they test those high standards on a regular basis. Individuals with this complicated environment require access to good independent advice.

Haldane’s real target was the continual introduction of new pension thinking and regulations that impacts on all previous regulations and means everyone’s current pension’s situation has to be re-assessed.

This 30-40 year, even longer, investment is complicated enough and at the mercy of all sorts of events, financial and otherwise, during that period even without this political meddling.

A recent survey by the Department for Business, Innovation and Skills has revealed that around 17 million adults in the UK have maths skills “no higher than a primary school child.”(1)

Yet the many articles that supported Haldane’s views in the days that followed blamed the real problem on the complexity of pension regulations, caused by the constant political tinkering on an almost annual basis.

Chancellor George Osborne has claimed to be the architect of the recent pension’s revolution, which offered individuals freedom by giving them alternatives to buying an annuity.

Osborne’s planned reform of tax relief on pension contributions has been put on the back burner for the moment, just when it seemed a standard rate (of between 25%-33%) would have brought some simplicity to a complex system.

The state pension age is currently being reformed, too, so that men and women retire at the same age. Such is the enormous expense of funding these state pensions that women now have to keep working until they are 65.

That age will continue to rise. We might be living longer, but we are also going to be working longer. For those born between July 6th 1967 and August 5th 1967, the state retirement age is to be 67 years and four months! (2)

Those in employment enjoying the security and benefits of a final salary scheme are growing fewer and fewer – that is a defined-benefit pension scheme. Those in a defined contribution pension scheme (now more common) end up with a pension pot that is determined by the amount contributed (by you and your employer) and its investment performance. (3)

Even a well-performing pension pot can cause problems as there is now a £1million-lifetime limit – breach that limit and tax is charged at 55% tax.

Many feel that limit is unrealistic in today’s world, especially as the Prudential has just calculated that today’s 18-year-old will have earned £1m by the time they are 46 years and one month in 2044.

The Prudential used figures supplied by the Office of National Statistics (ONC) and calculating wage inflation from the past 10 years, worked out a starting salary of £10,361 would rise to £51,679 in 2044. Out of that million, £238,000 will be paid in income tax and national insurance. (4)

Before retiring, those youngsters will earn over £2m. Many final experts don’t understand why Osborne, as coalition and then Tory chancellor, has reduced the pension lifetime limit from £1.8m to £1m, especially when it’s more than likely it will have to be raised in the future.

This pension limit is already creating situations where professionals, such as doctors, consider retiring early because their pension is already fully funded and one unwelcomed consequence of carrying on is a hefty tax bill. (5)

Unfortunately, politicians – with help from the Treasury – seem incapable of ever achieving their desired intent … to cut back on “red tape”. Osborne, after a bright start (which may have been down to influence of Coalition partners, the Lib Dems, and Danny Alexander in particular) has gone the way of Gordon Brown.

We now have increased pension confusion, two levels of Capital Gains Tax (CGT) – 28% on second homes and 18% on other gains – and your Inheritance Tax (IHT) Bill depends on whether you have children or grandchildren and own a property.

Why discriminate? Just legislate that by 2020, everyone in the land will have an IHT exemption of £500,000. Keep it simple.

Many complain that IHT is unfair because it means tax is paid twice - once through income tax, then by IHT. That’s not totally true. In today’s world, much of your estate could consist of an amount on which no tax has been paid – the increase in the value of your home.

No chancellor has yet dared threaten the tax-free status of your main residence. Perhaps, it could be part of a major simplification of our tax system – provided individuals benefit elsewhere.

Would there be an outcry if the government introduced a 10% property tax on the sale of all property – minus the buying and selling costs. If you have made £1/4m on your home, would you mind paying a tax bill of £25,000?

Probably not if, at the same time, the government reduce IHT to 20% with a personal £1/2million threshold – and any money used to pay off family student loans, as well as donations to charity, were made exempt from IHT tax.

Unfortunately, we can still only dream of a simple and transparent tax system, where everybody pays his or her fair share.